Share buybacks and what the dividend yield isn’t telling you

Seeing the elephant
Focusing too much on operations and not enough on capital allocation can be dangerous.
In his book, Shareholder Yield: A Better Approach to Dividend Investing, US author and investor Meb Faber tells the Indian parable of the blind men and the elephant. The curious group hears about a strange animal. They seek it out and each one inspects a different part of its body before arguing about what to make of this strange beast. “The creature is some kind of snake.” said the man who felt its trunk.
“No, no.” disagreed the next man, who felt its front leg. “The elephant is straight and sturdy, like a tree trunk.” And on and on they go, each party insisting the elephant is something else entirely. None of them could see the complete picture and all of them made incorrect conclusions.
When it comes to looking at stocks, to see the elephant, it helps to look not just at how a company generates cash, but how productively it deploys capital. A steadily increasing dividend isn’t always in the best interests of a company, for example. In fact, sometimes, it can get in the way of future growth.
Efficient capital allocation is…